The folly of volatility suppression: Why Catalonia is a warning for Europe

Complex systems that have artificially supressed volatility tend to become extremely fragile…although the stated intention of political leaders and economic policymakers is to stabilize the system by inhibiting fluctuations, the result tends to be the opposite.

Nassim Nicholas Taleb and Mark Blyth

The Black Swan of Cairo: How suppressing volatility makes the world less predictable and more dangerous- Foreign Affairs, May / June 2011

It has been only four months since Emmanuel Macron swept to power in France, prompting many to proclaim the end of populism in Europe. Well, four months is a long time in politics, and it has been made abundantly clear in that time that populism is anything but dead. Macron’s own approval rating has fallen to 32% and he is increasingly viewed as a ‘president of the rich’. Germany’s recent elections were a rebuke to Angela Merkel, and the Eurosceptic Alternative for Germany (AfD) party surged into 3rd place with the biggest electoral gains of any party. And most recently, the eruption of the crisis in Catalonia threatens to break up one of the EU’s largest member states, as Catalan nationalists aggressively demand the right to self-determination in the face of a nervous and reactionary Spanish government.

The Catalonian crisis is, in fact, an excellent example of the core problem facing the European Union. The EU, at its heart, is a political volatility-suppression machine, designed to subdue nationalism and populism, and maintain political stability. The main reason that the EU exists at all is to prevent the sort of interstate conflict, stoked by nationalist fervour, which tore the continent apart during the first half of the last century. However, the road to hell is said to be paved with good intentions, and the noble aspirations of the EU’s founding fathers will offer scant protection from the inherent flaws which are embedded into the very structure of the EU itself.

The problem with volatility-suppression strategies, whether in finance (link) or in politics is that, while they can work for a while, they often end up doing exactly the opposite of what is intended. Imagine a pot of boiling water on a stove. Trying to cover the pot with a lid to contain the steam and bubbling water may work temporarily – but the pressure will just continue to build, until the lid gets blown clear and scalding water sprays everywhere, probably causing much more damage than if the pot was just left to boil over naturally.

What is happening in Catalonia right now, with the de facto blessing of the EU, is a classic volatility suppression strategy. Declaring the referendum illegal and dealing forcefully with pro-independence protesters may keep Spain intact, at least in the short term, but it will only increase the support for the independence movement generally.

Likewise, the EU’s overarching political strategy, which involves suppressing political volatility by replacing the political structures and powers of the nation-state with those of supra-national institutions (like the European Court of Justice, the European parliament, and the European Commission) will inadvertently continue to foment populist and nationalist feeling in Europe, unwittingly setting the seeds of its own destruction. There are three main reasons why the EU’s structure encourages, and will continue to encourage, populist movements.

Firstly, the weakening of the nation states inadvertently encourages regional populist or independence movements. Human beings are tribal by nature; as Europeans become less emotionally attached to the nation state (and weakening these links is a European objective), they will look for a replacement. Whilst the European political class would like to think that Europe itself can be this replacement, with the Ode to Joy supplanting La Marseillaise and Il Canto degli Italiani, it is more likely that people will turn to more historically meaningful attachments – from Scotland and Catalonia to Northern Italy and Bavaria.

Secondly, the EU itself provides a kind of protective cover for nationalist movements, reducing the fear of the unknown which might otherwise prevent a population from attempting to go it alone. If a newly independent country can keep its currency, trade links and political institutions (the above mentioned ECJ, Commission etc), then declaring unilateral independence doesn’t seem like such a big deal. This strategy was deployed by the Scottish independence movement during the 2014 referendum campaign, and while the reality is more complex than pro-independence politicians let on (it is far from certain that an independent Scotland or Catalonia would be able to join the EU at all), the very existence of the EU does undoubtedly provide European populist movement with compelling narrative that independence need not be a risk.

Thirdly, the EU’s technocratic approach to governance weakens the emotional connection between the electorate and the intuitions designed to govern them. Most European citizens cannot name their Member of the European Parliament, nor understand the byzantine governance structures that make up the EU bureaucracy. Such a disconnected electorate is inevitably more vulnerable to the emotional appeal of a movement with ancient connections to a tribe or people.

It is unlikely the current crisis in Catalonia will, by itself, cause any lasting damage to the European Union. As is often the case in Europe, a solution will be found which addresses the immediate concerns of all parties (Spain will maintain its territorial integrity, the Catalans will gain more autonomy and / or money, the EU will not suffer any serious political blowback) but ignores the more fundamental issue. As is always the case, many well-meaning Europeans will implore the EU to use this crisis as an opportunity to enact meaningful reform (e.g. implement a more democratic, less centralized political model). This will not happen. Just like with recent European political risks (Dutch elections, French elections, German elections) what matters here is not the outcome, but the direction of travel. Whilst Wilders / Le Pen / the AfD did not win, these elections were unmistakeable signs of growing political unrest in Europe; Catalonia is just the latest visible symptom of this discontent. All eyes on Italy now…

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